TREASURIES-U.S. yields fall after inflation data, pare decline after auction

Updates prices, adds auction results, Brainard comments

By Chuck Mikolajczak

NEW YORK, April 12 (Reuters) – U.S. Treasury yields moved lower on Tuesday, with the benchmark 10-year Treasury yield on track for its first decline in eight sessions after a reading on inflation showed an acceleration in March, but sparked hope higher prices may have peaked.

The Labor Department said the consumer prices index (CPI) jumped 1.2% last month, in line with forecasts and the largest monthly gain since September 2005, versus a rise of 0.8% in February. nL2N2WA0W3

In the 12 months through March, CPI climbed 8.5%, the biggest year-on-year gain since December 1981, after a 7.9% rise in February and just above the 8.4% estimate.

“The concern for the bond and stock market is that core inflation was going to continue to move upward at a relentless pace and that it’s going to take a lot of action on the part of the Fed to stop that,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, NC.

“Any signs its moderating or slowing down … is going to be short term good news,” said Zaccarelli.

The yield on 10-year Treasury notes US10YT=RR was down 6.5 basis points to 2.718%. The yield had earlier climbed to 2.836%, its highest since Dec. 19, 2018.

Yields pared their declines, however, after a poor $34 billion auction of 10-year notes, with demand for the debt at 2.43 times the notes on sale well below average, according to analysts.

More supply is expected to come to the market on Wednesday with the Treasury scheduled to auction $20 billion in 30-year bonds.

The yield on the 30-year Treasury bond US30YT=RR was down 0.1 basis point to 2.820%. The yield had earlier touched 2.86%, its highest in nearly three years.

High inflation and comments from Federal Reserve officials have cemented the view the central bank will be more aggressive in taking steps to combat rising prices, which has also sparked concerns the Fed may make a policy error and cause a recession.

On Tuesday, Federal Reserve Governor Lael Brainard said the Fed could begin to trim its balance sheet in June, which combined with a series of interest rate hikes, will help tame high inflation. nL2N2WA1JE

Expectations for a 50 basis point rate hike at the Fed’s May meeting stand at 86.6%, according to CME’s FedWatch Tool, up from 41.7% one month ago.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=RR, seen as an indicator of economic expectations, was at 32.9 basis points after briefly inverting at the end of March, which is viewed by man as a reliable recession signal.

The two-year US2YT=RR U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 12.1 basis points at 2.387%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=RR was last at 3.438%, after closing at 3.371% on Monday.

The 10-year TIPS breakeven rate US10YTIP=RR was last at 2.894%, indicating the market sees inflation averaging 2.9% a year for the next decade.

(Additional reporting by Sinéad Carew; Editing by David Holmes and Nick Zieminski)

((charles.mikolajczak@tr.com; @ChuckMik;))